Lucknow University
BCOM SEM I
Solved Question Paper
Currency Banking and Exchange
Q1. Discuss the Method of Note Issue What do You Understand by Money & Also explain the Quantity Theory of Money.
Method of Issuing Paper Currency
Paper money is being used in the monetary system of most of the countries since very early times. The term paper money included the paper currency issued by the government or the Central Bank of country as a legal tender money. Cheques, bills of exchange and other kinds of money issued by the commercial banks is not included in the paper money because such money is not legal tender.
There are different methods of issuing paper money followed by different countries. Some of the important methods are discussed below:
Fixed Fiduciary System. According to this system, the Central Bank of country is permitted to issue a fixed amount of currency notes without keeping any metallic reserve (gold, silver, etc) against the issue. But all notes issued beyond this fixed amount are to be covered by hundred per cent reserve of precious metal such as gold. This system of note issue is safe because it puts a restraint on the issue of currency inelastic and unresponsive to changing requirement of trade and industry.
Proportional Reserve System. Under this system the Central Bank is required to keep a fixed percentage of gold reserve against the issue of paper currency. This system of note issue was adopted by many counties including France. The chief merit of this system is that is that it is elastic. Requirements of more currency can be met by a greater amount of note issue and keeping only a small proportion of it in the form of gold reserves.
Minimum Reserve system. Under this system, the Central Bank is required to keep with it certain minimum amount of gold reserves as prescribed by law and against this, issue any amount of paper currency keeping in view the requirements of the economy. In India this system of note issue being currently followed. The idea behind the adoption of this method of note issue is to ensure that the currency requirements of the trade and industry in the developing economy are being met adequately. Thus, the system of issuing paper currency is more elastic and works wonderfully well if it is properly regulated and constantly watched by the government.
Money is any object that is generally accepted as payment for goods and services and repayment of debts in a given country or socio-economic context. The main functions of money are distinguished as: a medium of exchange; a unit of account; a store of value; and, occasionally, a standard of deferred payment.
Money originated as commodity money, but nearly all contemporary money systems are based on fiat money.
The quantity theory of money is a theory that variations in price relate to variations in the money supply. It is most commonly expressed and taught using the equation of exchange and is a key foundation of the economic theory of monetarism.
The quantity theory of money is a framework to understand price changes in relation to the supply of money in an economy. It argues that an increase in money supply creates inflation and vice versa.
The Irving Fisher model is most commonly used to apply the theory. Other competing models were formulated by British economist John Maynard Keynes, Swedish economist Knut Wicksell, and Austrian economist Ludwig von Mises.
The other models are dynamic and posit an indirect relationship between money supply and price changes in an economy.
The most common version, sometimes called the "neo-quantity theory" or Fisherian theory, suggests there is a mechanical and fixed proportional relationship between changes in the money supply and the general price level. This popular, albeit controversial, formulation of the quantity theory of money is based upon an equation by American economist Irving Fisher.
M×V=P×T
where:
M=money supply
V=velocity of money
P=average price level
T=volume of transactions in the economy
Generally speaking, the quantity theory of money explains how increases in the quantity of money tends to create inflation, and vice versa. In the original theory, V was assumed to be constant and T is assumed to be stable with respect to M, so that a change in M directly impacts P. In other words, if the money supply increases then the average price level will tend to rise in proportion (and vice versa), with little effect on real economic activity.
For example, if the Federal Reserve (Fed) or European Central Bank (ECB) doubled the supply of money in the economy, the long-run prices in the economy would tend to increase dramatically. This is because more money circulating in an economy would equal more demand and spending by consumers, driving prices up.
Q2.Explain the Following.
A)E- Money
Ans: Electronic money refers to money that exists in banking computer systems that may be used to facilitate electronic transactions. Although its value is backed by fiat currency and may, therefore, be exchanged into a physical, tangible form, electronic money is primarily used for electronic transactions due to the sheer convenience of this methodology.
Electronic money is currency that is stored in banking computer systems.
Electronic money is backed by fiat currency, which distinguishes it from cryptocurrency.
Various companies allow for transactions to be made with electronic money, such as Square or PayPal.
The prevalence of electronic money has led to the diminishing use of physical currency.
Although electronic money is often considered safer and more transparent than physical currency, it is not without its risks.
B)Explain the Monetary Standards & Also explain the Types of Monetary Standards.
Ans: A monetary standard is a set of institutions and rules governing the supply of money in an economy. These rules and institutions collectively constrain the production of money. Through its constraints on money creation, the standard indirectly acts on prices. A monetary standard may also affect the rate of growth of real economic output, but that depends on expectations. Monetary institutions may also affect other economic institutions, which themselves influence economic growth.
Overall there can be two main kinds of monetary standards – metallic standards or paper standard. Metallic standards themselves can be of two types – monometallism and bimetallism.
1] Monometallism
Also known as Single Standard, here only one metal is adopted as the standard currency/money. The monetary system is made up of and relies entirely on one metal, like say the gold standard or the silver standard. So coins are made up of one metal only.
2] Bimetallism
As the name suggests, in the double standard or bimetallism system, two metals are adopted as standard money. There is a fixed legal ratio between the value of the two metals to facilitate exchange. Usually, the two metals are gold and silver. So two types of standard coins are minted (gold and silver).
3] Paper Currency Standard
Under this monetary standard, the currency prevailing in the economy will be paper currency. In most cases, this currency system is managed by the Central Bank of the country, RBI in the case of India, and so we can also call it Managed Currency Standard. The currency consists of bank notes and government notes.
Most countries of the world follow this monetary standard. This is because it is a managed and controlled system. So an authority will monitor the quantity of money supply keeping in mind the stability in prices and income in the economy. It is also very economical in terms of production (currency notes). And they are far more convenient than metallic standards.
Unit: II
Q1.What is Credit Creation by Commercial Bank? What are advantage & Disadvantage of Credit Creation.
Ans: In very simple terms, a bank is separated from other financial banks by credit creation. Credit Creation is the expansion of the deposits. Also, the banks can expand their demand deposits as a multiple of their cash reserves because the demand deposits serve as a principal medium of exchange.
Demand deposits are a very crucial constituent of the money supply. The expansion of the demand deposits means the expansion of the money supply. The entire banking structure is based on credit. The meaning of credit is to get the purchasing power now and promise to pay at some time in the future. And bank credit means the bank loans as well as the advances. A bank keeps a certain part of its deposits as a minimum reserve to meet the demands of its depositors and the rest is lending out to earn an income. The account of the browser is given the loan. Every bank creates an equivalent deposit in the bank. Hence, credit creation means expanding bank deposits.
The Two Pivotal Aspects of Credit Creation
Liquidity
The banks are bound to pay cash to their depositors when they exercise their right to demand cash against their depositors.
Profitability
The banks always look for profit. They are profit-driven enterprises. This is the reason why a bank must grant loans in such a manner that will help to earn higher interest than what it pays on its deposits.
The bank’s credit process is based on the assumption that at any time only a few customers will genuinely need cash. Also, on the other hand, the banks assume that all their customers will not turn up demanding cash against their deposits at one point in time.
Know About the Basic Concepts of Credit Creation
1. Bank as a business institution
One has to believe that banks are a business institution that always tries to maximize profits through loans and the advances from the deposits.
2. Bank Deposits
Bank deposits are the basis for credit creation. Bank deposits are of two types as follows:
a. Primary Deposits-
A bank accepts cash from the customers and opens a deposit in his or their name. This is called a primary deposit and this does not mean a credit creation.
These deposits are simply converted into deposit money from currency money. These deposits form the basis for credit creation.
b. Secondary or Derivative Deposits-
A bank grants loans and advances. Instead of giving cash to the borrower, the bank opens a deposit account in his or her name. This is called the secondary or derivative deposit.
Every loan creates a deposit and the creation of a derivative deposit means the creation of the credit.
Process of Credit Creation by Commercial Banks
A central bank is the primary source of money supply in an economy of a nation through the circulation of currency. It ensures the availability of the currency for meeting the transaction needs of an economy. It also facilitates various economic activities such as production, distribution as well as consumption. For this purpose, the central bank needs to depend upon the reserves of the commercial banks which are the secondary source of money supply in an economy.
The most crucial purpose of a commercial bank is the creation of credit. This is the reason why the money supplied by commercial banks is called credit money. All commercial banks create credit by advancing loans and purchasing securities. They lend money to the individuals as well as to the businesses out of deposits accepted from the public.
Commercial banks are not allowed to use the entire amount of public deposits for lending purposes. They are accepted to keep a certain amount as a reserve with the central bank. This is for serving the cash needs of the depositors.
The commercial banks can lend the remaining portion of the public deposits after keeping the expected amount of reserves.
Factors affecting Credit Creation by Commercial Banks
Factors that have an Effect on the Creation of Credit are as follows:
The capacity of the bank banks to create credits which are a matter of the availability of cash deposits with banks. Also, the capacity to create credit depends on the factors that determine their cash deposit ratio.
The desire of the banks to create credits.
The demand for credit in the market.
Advantages and Limitation of Credit Creation by Commercial Banks
On the advantageous side, the depositors can access a wider range of products that the intermediaries offer that can easily be converted into cash. Investment of the company shares (mutual funds) can also be liquidated in a very easy manner.
On the disadvantageous side, there are several limitations, these are as follows:
Lack of securities.
The Business Environment
Lack of Cash
The habits of the people
Leakages
Q2. What are the functions of the Reserve Bank of India?How Does RBI Control the Credit.
Ans: RBI is an institution of national importance and the pillar of the surging Indian economy. It is a member of the International Monetary Fund (IMF).
The concept of Reserve Bank of India was based on the strategies formulated by Dr. Ambedkar in his book named “The Problem of the Rupee – Its origin and its solution”.
This central banking institution was established based on the suggestions of the “Royal Commission on Indian Currency & Finance” in 1926. This commission was also known as Hilton Young Commission.
In 1949, the Reserve Bank of India was nationalized and became a member bank of the Asian Clearing Union.
RBI regulates the credit and currency system in India.
The chief objectives of the RBI are to sustain the confidence of the public in the system, protect the interests of the depositors, and offer cost-effective banking services like cooperative banking and commercial banking to the people.
The main functions of the Reserve Bank of India are as follows:
Monetary Authority
Regulator and administrator of the financial system
Managing Foreign Exchange
Issuer of currency
Developmental role
The different instruments of credit control used by the Reserve Bank of India are Statutory Liquidity Ratio (SLR), Cash Reserve Ratio (CRR), the Bank Rate Policy, Selective Credit Control (SCC), Open Market Operations (OMOs). The Reserve Bank of India is authorised to make monetary policy under the Reserve Bank of India Act, 1934.
Statutory Liquidity Ratio - SLRIn this article, the Statutory Liquidity Ratio(SLR) has been discussed in details. Apart from SLR, there are terms like CRR, bank rate, the repo rate, reverse repo rate, etc.
Statutory Liquidity Ratio or SLR is the minimum percentage of deposits that a commercial bank has to maintain in the form of liquid cash, gold or other securities. It is basically the reserve requirement that banks are expected to keep before offering credit to customers. The SLR is fixed by the RBI and is a form of control over the credit growth in India.
The government uses the SLR to regulate inflation and fuel growth. Increasing the SLR will control inflation in the economy while decreasing the statutory liquidity rate will cause growth in the economy. The SLR was prescribed by Section 24 (2A) of Banking Regulation Act, 1949.
Cash Reserve Ratio (CRR)
CRR is an important tool of the Monetary Policy. Monetary Policy is the process of regulating the supply of money in an economy by the monetary authority of the country. A specific CRR is provided to each commercial bank in India by the RBI. The Reserve Bank of India is authorised to make monetary policy under the Reserve Bank of India Act, 1934 and can set the cash reserve ratio between 3% and 15%.
Cash Reserve Ratio (CRR) is a specific part of the total deposit that is held as a reserve by the commercial banks and is mandated by the Reserve Bank of India (RBI). This specific amount is held as a reserve in the form of cash or cash equivalent which is stored in the bank’s vault or is sent to the RBI. CRR ensures that the banks do not run out of money.
Cash Reserve Ratio in India is decided by the Monetary Policy Committee (MPC) under the periodic Monetary and Credit Policy. If the CRR is low, the liquidity with the bank increases, which in turn goes into investment and lending and vice-versa. Higher CRR creates a negative impact on the economy and also lowers the availability of loanable funds. As a result, it slows down the investment and reduces the supply of money in the economy.
Open Market Operation (OMO)
An Open Market Operation (OMO) is the buying and selling of government securities in the open market, hence the nomenclature. It is done by the central bank in a country (the RBI in India). When the central bank wants to infuse liquidity into the monetary system, it will buy government securities in the open market. This way it provides commercial banks with liquidity. In contrast, when it sells securities, it curbs liquidity. Thus, the central bank indirectly controls the money supply and influences short-term interest rates. In India, after the economic reforms of 1991, the OMO has gained more importance than the CRR (cash reserve ratio) in adjusting liquidity.
Bank Rate:
The bank rate is the rate of interest which is charged by a central bank while lending loans to a commercial bank. In the event of a fund deficiency, a bank can borrow money from the central bank of a country. In India’s case that would be the Reserve Bank of India. The borrowing is done as per the basis of the monetary policy of that country.
Q3. Explain the Following?
1) Repo rate or repurchase rate is referred to as the rate at which the central bank (RBI) lends money to the commercial banks for meeting short-term fund requirements in order to maintain liquidity and control inflation.
Functioning of Repo Rate
Commercial banks, at times of financial crunch, seek short-term funds from the central bank of a country (RBI in the case of India) to tide over the financial crisis. For providing these funds, RBI levies interest on the amount that is lent to the commercial bank. This rate of interest is better known as the repo rate.
Repo rate is technically a repurchase agreement in which the commercial banks offer securities such as Treasury Bills to the RBI in return for short-term funds.
The banks also agree to repurchase those securities at a predetermined price.
B) Reverse repo rate
RBI maintains a balance in the market by employing repo rate and reverse repo rate. The reverse repo rate, by definition, is the exact opposite of repo rate or in other words, it is the rate at which RBI borrows money from banks in the short term.
Impact of Repo Rate in Economy
Repo rate is an important component of the monetary policy of the nation, and it is used to regulate the liquidity, inflation, and money supply of the nation. Additionally, repo rate levels create a direct impact on the pattern of borrowing by the banks.
In other words, in situations of increased repo rate, the banks need to pay higher interest to RBI in order to avail funds, while in terms of lower repo rate, the cost of borrowing funds is less.
The following scenarios discuss the impact of the repo rate on the economy.
1. When the inflation rate is high: At times of high inflation in the economy, the central bank (RBI) regulates the flow of money in the economy by increasing the repo rate, which results in fewer borrowings by the businesses and the industries. The result of this increase is slowing down the money supply and investment activities in the economy, which is instrumental in controlling the inflation rate.
2. To increase liquidity in the economy: When there is a requirement of increasing liquidity in the market, RBI eases the repo rate so that businesses can borrow money for investment purposes, which results in an increased money supply in the economy. The effect of such a step is that it becomes instrumental in the growth of the economy.
Unit III
Q1.Write on essay on Central Bank and Commercial Banks. Explain there Function.
Ans:Central Bank
Central bank is regarded as an apex financial institution in the banking system. It is considered as an integral part of the economic and financial system of a nation. The central bank functions as an independent authority and is responsible for controlling, regulating and stabilising the monetary and banking structure of the country.
In India, the Reserve Bank of India is regarded as the central bank. It was set up in 1935. Central banks are responsible for maintaining the financial stability and economic sovereignty of the country.
The functions of a central bank can be discussed as follows:
1. Currency regulator or bank of issue
2. Bank to the government
3. Custodian of Cash reserves
4. Custodian of International currency
5. Lender of last resort
6. Clearing house for transfer and settlement
7. Controller of credit
8. Protecting depositors interests
The above mentioned functions will be discussed in detail in the following lines.
Currency regulator or bank of issue: Central banks possess the exclusive right to manufacture notes in an economy. All the central banks across the world are involved in issuing notes to the economy.
This is one of the most important functions of the central bank in an economy and due to this the central bank is also known as the bank of issue.
Earlier all the banks were allowed to publish their own notes which resulted in a disorganised economy. To avoid this situation the government around the world authorised the central banks to function as the issuer of currency, which resulted in uniformity in circulation and balanced supply of money in the economy.
Bank to the government: One of the important functions of the central bank is to act as the bank to the government. The central bank accepts deposits and issues funds to the government. It is also involved in making and receiving payments for the government. Central banks also offer short term loans to the government in order to recover from bad phases in the economy.
In addition to being the bank to the government, it acts as an advisor and agent of the government by providing advice to the government in areas of economic policy, capital market, money market and loans from the government.
In addition to that, the central bank is instrumental in formulation of monetary and fiscal policies that help in regulation of money in the market and controlling inflation.
Custodian of Cash reserves: It is a practice of the commercial banks of a country to keep a part of their cash balances in the form of deposits with the central bank. The commercial banks can draw that balance when the requirement for cash is high and pay back the same when there is less requirement of cash.
It is for this reason that the central bank is regarded as the banker’s bank. Central bank also plays an important role in the credit creation policy of commercial banks.
Custodian of International currency: An important function of the central bank is to maintain a minimum balance of foreign currency. The purpose of maintaining such a balance is to manage sudden or emergency requirements of foreign reserves and also to overcome any adverse deficits of balance of payments.
Lender of last resort: The central bank acts as a lender of last resort by providing money to its member banks in times of cash crunch. It performs this function by providing loans against securities, treasury bills and also by rediscounting bills.
This is regarded as one of the most crucial functions of the central bank wherein it helps in protecting the financial structure of the economy from collapsing.
Clearing house for transfer and settlement: Central bank acts as a clearing house of the commercial banks and helps in settling of mutual indebtedness of the commercial banks. In a clearing house, the representatives of different banks meet and settle the inter bank payments.
Controller of credit: Central banks also function as the controller of credit in the economy. It happens that commercial banks create a lot of credit in the economy that increases the inflation.
The central bank controls the way credit creation by commercial banks is done by engaging in open market operations or bringing about a change in the CRR to control the process of credit creation by commercial banks.
Protecting depositors interests: Central bank also needs to keep an eye on the functioning of the commercial banks in order to protect the interests of depositors.
Commercial Bank
A commercial bank is a kind of financial institution that carries all the operations related to deposit and withdrawal of money for the general public, providing loans for investment, and other such activities. These banks are profit-making institutions and do business only to make a profit.
The two primary characteristics of a commercial bank are lending and borrowing. The bank receives the deposits and gives money to various projects to earn interest (profit). The rate of interest that a bank offers to the depositors is known as the borrowing rate, while the rate at which a bank lends money is known as the lending rate.
Function of Commercial Bank:
The functions of commercial banks are classified into two main divisions.
(a) Primary functions
Accepts deposit : The bank takes deposits in the form of saving, current, and fixed deposits. The surplus balances collected from the firm and individuals are lent to the temporary requirements of the commercial transactions.
Provides loan and advances : Another critical function of this bank is to offer loans and advances to the entrepreneurs and business people, and collect interest. For every bank, it is the primary source of making profits. In this process, a bank retains a small number of deposits as a reserve and offers (lends) the remaining amount to the borrowers in demand loans, overdraft, cash credit, short-run loans, and more such banks.
Credit cash: When a customer is provided with credit or loan, they are not provided with liquid cash. First, a bank account is opened for the customer and then the money is transferred to the account. This process allows the bank to create money.
(b)Secondary functions
Discounting bills of exchange: It is a written agreement acknowledging the amount of money to be paid against the goods purchased at a given point of time in the future. The amount can also be cleared before the quoted time through a discounting method of a commercial bank.
Overdraft facility: It is an advance given to a customer by keeping the current account to overdraw up to the given limit.
Purchasing and selling of the securities: The bank offers you with the facility of selling and buying the securities.
Locker facilities: A bank provides locker facilities to the customers to keep their valuables or documents safely. The banks charge a minimum of an annual fee for this service.
Paying and gathering the credit : It uses different instruments like a promissory note, cheques, and bill of exchange.
Types of Commercial Banks:
There are three different types of commercial banks.
Private bank –: It is a type of commercial banks where private individuals and businesses own a majority of the share capital. All private banks are recorded as companies with limited liability. Such as Housing Development Finance Corporation (HDFC) Bank, Industrial Credit and Investment Corporation of India (ICICI) Bank, Yes Bank, and more such banks.
Public bank –: It is a type of bank that is nationalised, and the government holds a significant stake. For example, Bank of Baroda, State Bank of India (SBI), Dena Bank, Corporation Bank, and Punjab National Bank.
Foreign bank –: These banks are established in foreign countries and have branches in other countries. For instance, American Express Bank, Hong Kong and Shanghai Banking Corporation (HSBC), Standard & Chartered Bank, Citibank, and more such banks.
Explain the Following
A) Regional Rural Banks
Regional Rural Banks were establishedunder the provisions of an Ordinance passed on September 1975 and the RRB Act. 1976 to provide sufficient banking and credit facility for agriculture and other ruralsectors.In the early 1970s, there was a feeling that even after nationalization, there were cultural issues which made it difficult for commercial banks, even under government ownership, to lend to farmers. This issue was taken up by the government and it set up Narasimham Working Group in 1975. On the basis of this committee’s recommendations, a Regional Rural Banks Ordinance was promulgated in September 1975, which was replaced by the Regional Rural Banks Act 1976.
Regional Rural Banks (RRBs) are government owned scheduled commercial banks of India that operate at regional level in different states of India. These banks are under the ownership of Ministry of Finance , Government of India. They were created to serve rural areas with basic banking and financial services. However, RRBs also have urban branches.
The area of operation is limited to the area notified by the government of India covering, and it covers one or more districts in the State. RRBs perform various functions such as providing banking facilities to rural and semi-urban areas, carrying out government operations like disbursement of wages of MGNREGA workers and distribution of pensions, providing para-banking facilities like locker facilities, debit and credit cards, mobile banking, internet banking, and UPI services.
B) E- Banking
Meaning of E-Banking:
Banks give administrations or bank services to draw in clients, from giving advances, issuing of debit cards and credit cards, computerised monetary services, and surprisingly personal services or administrations. Even so, some fundamental present-day administrations are presented by many commercial banks.
Electronic banking has many names like web-based banking, e-banking, virtual banking, or web banking, and online banking. It is just the utilisation of telecommunications networks and electronic networks for conveying different financial services and products. Through e-banking, a client can acquire his record and manage numerous exchanges utilising his cell phone or personal computer.
Classification of E-Banking:
Banks offer different kinds of services through electronic financial stages. These are of three sorts:
Type 1:
This is the essential degree of administrations or services that banks offer through their sites. Through this assistance, the bank offers data, information regarding its services and products to clients. Further, a few banks might respond to an inquiry through email as well.
Type 2:
In this category, banks permit their clients to submit directions or applications for various administrations, check their record balance, and so on. Be that as it may, banks don’t allow their clients to do any fund-based exchanges with respect to their records or accounts.
Type 3:
In the third category, banks permit their clients to work or operate their records or accounts for bill payments, purchase and redeem securities and fund transfers, and so on.
Most conventional banks offer e-banking administrations as an extra technique for offering support. Further, many new banks convey banking administrations principally through the other electronic conveyance channels or web. Likewise, a few banks are ‘internet only’ banks with no actual branch anyplace in the country.
In this way, banking sites are of two sorts:
Transactional Websites: These sites permit clients to go through with exchanges on the bank’s site. Further, these exchanges can go from a plain retail account balance request to huge business-to-business liquid assets transfers. The accompanying table records some normal wholesale and retail e-banking administrations presented by financial institutions and by banks.
Informational Websites: These sites offer general data regarding the bank and its services and products to the clients.
Wholesale services by banks: Include Account management, Cash management, Small business loan applications, Approvals or advances, Commercial wire transfer, Business-to-business payments, Employee benefit, and Pension administration.
Retail services by banks: Include Account management, Bill payment, New account opening, Consumer wire transfers, Investment and brokerage services, Loan application and approval, and Account Aggregation.
Services Under E-Banking:
Mobile Banking:
Mobile banking (otherwise called M-banking) is a name utilised for performing account exchanges or transactions, bill payments, credit applications, balance checks, and other financial exchanges through a mobile phone like a Personal Digital Assistant (PDA) or cell phone.
Electronic Clearing System (ECS):
The Electronic Clearing System is a creative provision for occupied individuals. With this provision, an individual’s credit card bill is consequently charged from the same individual’s savings bank account, so one doesn’t have to stress over missed or late payments.
Smart Cards:
A smart card is a card that stores data on a microchip or memory chip or a microprocessor in lieu of the magnetic stripe found on debit cards and credit cards. Smart cards are not utilised for transferring or moving monetary data alone, but also they can be utilised for an assortment of identification grounds. Exchanges made with smart cards are scrambled or encrypted to shield the exchange of data from one party to another. Each encoded exchange can’t be hacked and doesn’t transmit any extra data past what’s required for finishing the single exchange or transaction.
Electronic Fund Transfers (ETFs):
Electronic fund transfer (EFT) is the electronic exchange of cash starting with an individual account in the bank to another individual account of the same bank, or within or with other financial institutions or with multiple institutions, by means of personal computers based frameworks, without the immediate intercession of bank staff.
Telephone Banking:
Telephone banking is an assistance given by a bank or other monetary foundation or other financial institutions, that empower clients to perform via telephone a scope of monetary exchanges which don’t include cash or financial instruments, without the need to visit an ATM or a bank branch.
Internet banking:
Web-based banking is an assistance presented by banks that permits account holders to get their record information by means of the web or the internet. Web-based banking or Internet banking is otherwise called “Web banking” or “Online banking.”
Internet banking through customary banks empowers clients to play out every standard exchange, for example, bill payments, balance requests, stop-payment requests, and balance inquiries. Some banks even proposition online credit card and loan applications.
Account data can be acquired day or night, and should be possible from any place.
Home banking:
Home banking is the most common way of concluding the monetary exchange from one’s own home as opposed to using a bank’s branch. It incorporates making account requests, moving cash, covering bills, applying for credits, and directing deposits.
Significance of E-Banking:
Importance to clients:
Lower cost per exchange: Since the client doesn’t need to visit the branch for each exchange, it saves him both time and cash.
No topographical hindrances: In conventional financial frameworks, geological distances could hamper specific financial exchanges. Nonetheless, with e-banking, geological obstructions are diminished.
Convenience: A client can get to his record or bank account and execute from any place at any time.
Importance to Businesses:
Better efficiency: Electronic banking further develops usefulness. It permits the computerisation of ordinary, regularly scheduled payments and provides further banking activities to upgrade the efficiency of the business.
Lower costs: Usually, costs in financial relationships and connections depend on the assets used. Assuming that a specific business needs more help with deposits, wire transfers, and so on, then, at that point, the bank charges its higher expenses. With internet banking, these costs are limited.
Lesser errors: Electronic financial diminishes mistakes in normal financial exchanges. Awful penmanship, mixed-up data or information, and so on can cause mistakes that can be exorbitant. Likewise, a simple audit of the record or account activity, movement upgrades the precision of monetary exchanges.
Diminished misrepresentation: Electronic banking gives an advanced impression to all representatives who reserve the privilege to alter banking exercises. In this manner, the business has better perceivability into its exchanges, making it hard for any fraudsters from committing crimes.
Account reviews: Business proprietors and assigned staff individuals can get to the records rapidly utilising a web-based financial interface. This permits them to audit the record action and, furthermore, guarantee the smooth working of the account.
Importance to banks:
Lesser exchange costs: Electronic exchanges are the least expensive methods of exchange.
A decreased edge for human blunder: Since the data is handed-off electronically, there is no space for human mistakes or errors.
Lesser desk work: Advanced records decrease desk work, paperwork, and make the cycle simpler to deal with. Likewise, it is ecological.
Decreased fixed expenses: A lesser requirement for branches which converts into a lower fixed expense.
More steadfast clients: Since e-banking administrations or services are convenient to the clients, banks experience higher reliability from their clients.
D)Postal Banking:
In postal banking, your local post office offers some basic financial services, much like a commercial bank. Postal banking is common in much of the world and was once available in the United States. Now some advocates believe bringing it back could be a low-cost solution for the country's large unbanked population.
How Postal Banking Works
With postal banking, the local post office also serves as a sort of bank branch. It might provide, for example, check cashing, bill payment processing, and even small loans.
Today, post offices in the U.S. do not typically provide these services, although they may sell postal money orders, a convenience for people who need to pay a bill or want to send money safely to someone but who don't have a checking account. Recipients can also cash money orders at a post office location.
Generations ago, post offices weren't that limited. From 1911 through 1967, the U.S. had a Postal Savings System, where Americans could deposit their money in government-backed, interest-earning accounts. But as commercial banks raised their interest rates on savings accounts, demand for the Postal Savings System declined, and the program came to an end in 1967.
Unit-IV
Q1.Expalin exchange control & also explain the objective & Various method of exchange control.
Exchange controls are government-imposed limitations on the purchase and/or sale of currencies. These controls allow countries to better stabilize their economies by limiting in-flows and out-flows of currency, which can create exchange rate volatility. Not every nation may employ the measures, at least legitimately; the 14th article of the International Monetary Fund's Articles of Agreement allows only countries with so-called transitional economies to employ exchange controls.
Objectives of Foreign Exchange Control
1.Restore the balance of payments equilibrium
The main objective of introducing exchange control regulations is to correct the balance of payments equilibrium. The BOP needs realignment when it is sliding to the deficit side due to greater imports than exports. Hence, controls are put in place to manage the dwindling foreign exchange reserves by limiting imports to essentials items and encouraging exports through currency devaluation.
2. Protect the value of the national currency
Governments may defend their currency’s value at a certain desired level through participating in the foreign exchange market. The control of foreign exchange trading is the government’s way to manage the exchange rate at the desired level, which can be at an overvalued or undervalued rate.
The government can create a fund to defend currency volatility to stay in the desired range or get it fixed at a certain rate to meet its objectives. An example is an import-dependent country that may choose to maintain an overvalued exchange rate to make imports cheaper and ensure price stability.
3.Prevent capital flight
The government may observe increased trends of capital flight as residents and non-residents start making amplified foreign currency transfers out of the country. It can be due to changes in economic and political policies in the country, such as high taxes, low interest rates, increased political risk, pandemics, and so on.
The government may resort to an exchange control regime where restrictions on outside payments are introduced to mitigate capital flight.
4.Protect local industry
The government may resort to exchange control to protect the domestic industry from competition by foreign players that may be more efficient in terms of cost and production. It is usually done by encouraging exports from the local industry, import substitution, and restricting imports from foreign companies through import quotas and tariff duties.
5.Build foreign exchange reserves
The government may intend to increase foreign exchange reserves to meet several objectives, such as stabilize local currency whenever needed, paying off foreign liabilities, and providing import cover.
Consequences of Exchange Controls
Exchange controls can be effective in some instances, but they can also come with negative consequences. Often, they lead to the emergence of black markets or parallel markets in currencies. The black markets develop due to higher demand for foreign currencies that is greater than the supply in the official market. It leads to an ongoing debate about whether exchange controls are effective or not.
The methods of exchange control may be classified broadly into two groups:
1. Direct Methods
2. Indirect Methods.
Direct Method: The central bank of the country, which is exchange control authority, adopts a number of direct methods, which restrict the use and quantity of foreign exchange. They are as under.
1.Exchange Restriction-All foreign currencies are pooled with, the central bank which in turn sanctions and allocates than in accordance with the rules laid down by the government.
2.Allocation according to priorities: This is the simplest method. As the foreign currencies available with the central bank are always limited in quantities, it will allocate then to finance imports and to make other foreign payments. It will do so in accordance with certain principles of priorities. All essential items of imports such as food, raw materials, capital goods, intermediate products, etc will be accorded priorities in allocating foreign exchange over non-essential and luxury imports.
3.Multiple Exchange Rates: When a country establishes different exchange rates for earn of several categories of imports exports and capita transfers it is known as the methods of multiple exchange rates. This systern of exchange control is operated in w such a way that lie value of imports is reduced and the foreign value of exports is increased. The aim is to achieve the balance of payments equilibrium for the country by reducing imports and increasing exports.
4.Blocked Accounts Under this system of exchange control, payments for import are credited to blocked accounts in the name of the foreign exporters. Such account may be kept in the central bank of the debt or country. The creditors are prohibited for some time from drawing on them. However, they can be used in the controlling country where such accounts are located.
5.Clearing Agreements Under this method of exchange control, two trading countries agree to establish an account in their respective central bank through which all payments for export and imports are cleared. This method is known as bilateral clearing or clearing agreement of exchange clearing
6.Payments Agreements: Payment agreements are another form of bilateral agreements but they are wider in scope than clearing agreements. Beside trade transactions, they include various service transactions such as shipping charges, debt service, tourism, etc which are reflected in the balance of payments. A payments agreement is usually made for the repayment of the debt by one country to the other. Under this system of exchange control, a certain percentage of payments for imports by the credit or country are passed on to its clearing account for the repayment of its debt.
Indirect Methods:
Quantitative Restrictions Quantitative restrictions or commercial control include import restrictions, import embargoes, import quotas and buying policies of state trading corporations. All these lunit imports Quantitative import controliestricts the amount (in value or quantity) of the commodity to be imported. The aim is to curtail value to correct disequilibrium in the balance of payments
(h) Export Bounties: A bounty on exports has an effect of raising the external value of the country giving the bounty. But export bounties are limited by the number of funds with the government. (c) Raising Interest Rates Changes in the interest rates within a country also influences its foreign exchange rate
When interest rate increases in a country, it attracts capital funds from other countries and prevents the outflow domestic funds to other countries. Consequently, the demand for its currency rises which raises its external value and makes the foreign exchange rate favorable to it.
B)explain the Following Theories.
A)Mint Parity Theory:
Mint parity theory explains the determination of exchange rate between the two gold standard countries. In a country on gold standard, the currency is either made of gold or its value is expressed in terms of gold. According to the mint parity theory, the exchange rate under gold standard is equivalent to the gold content of one currency relative to that of another. This exchange rate is also known as mint rate.
(a) The standard monetary unit is defined in terms of gold, i.e., either it is made of gold of given purity and weight, or it is convertible into gold at fixed rate.
(b) The government buys and sells gold in unlimited quantity at officially fixed price,
(c) There are no restrictions on the export and import of gold.
B)Purchasing Power Parity Theory:
Purchasing power parity theory explains the determination of exchange rate and its fluctuations when the countries are on inconvertible paper standard. The theory was first propounded by wheatlay in 1802, but the credit for properly developing the theory in the present form goes to Gustav Cassel who gave its systematic statement in 1918.
The theory is based on the fundamental principle that the different currencies have purchasing powers in their respective countries. When the domestic currency is exchanged for the foreign currency it is, in fact, the domestic purchasing power which is exchanged for the foreign purchasing power. Thus the most important factor determining the exchange rate is the relative purchasing power of the two currencies.According to the purchasing power parity theory, under the system of inconvertible paper currency, the rate of exchange is determined by the relative purchasing powers of the two currencies in their respective countries.
A country is said to be on inconvertible paper standard when- (a) money is made of paper or some cheap metals and its face value is greater than its intrinsic value; (b) the money is not convertible into gold; (c) the purchasing power of money is not maintained at par with that of gold or any other commodity; (d) the currency may not be fully backed by gold or any other metallic reserves; (e) the currency system is nationalistic in the sense that there is no link between the different paper currency systems adopted by different countries. Under such conditions, the rate of exchange between the two currencies must equalise the purchasing power of both the countries.
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